Micro Focus to Acquire NetManage for $73.3 Million in Cash

May 5, 2008 Timothy Prickett Morgan

In these times of tight credit, cash is without a doubt king. Or at least a knight, considering how inflation is affecting the cost of the consumables we all buy to live. Nothing demonstrates the power of cash more than the contrast between Rocket Software‘s failed $69 million attempt to acquire host connectivity and application modernization software maker NetManage, which was launched in December 2007 and withdrawn in March because Rocket Software could not raise the capital it needed, and an a $73.3 million all-cash deal announced last Thursday by COBOL and application modernization tool maker Micro Focus International.

Given that Micro Focus is offering $73.3 million in cash to acquire NetManage, which is based on a $7.20 per share offer and which represents a 73 percent premium over the closing price of $4.15 per share on April 30 for NetManage’s stock, it seems likely that NetManage’s shareholders will be pretty happy about taking the deal. And that will be true despite NetManage’s protestations two years ago after Attachmate and WRQ were merged by private equity firms and NetManage spurned a buyer, and after the company’s president, chief executive officer, and chairman, Zvi Alon, said in March after Rocket Software withdrew its bid that he continued “to be excited about the opportunities ahead for us as a standalone company and the strong pipeline of new business prospects and product developments in the future.” Public companies are always for sale–whether they like it or not–since that is the nature of being a public company. A stock market is just buyers haggling over the price, when you get right down to it.

At any rate, Alon is putting all of his support behind the Micro Focus acquisition, as is the company’s board of director, just as they did the Rocket Software deal five months ago. “We feel confident this is the right strategy for our shareholders, customers, and employees and that Micro Focus will continue to build on our legacy,” Alon said in a statement announcing the proposed acquisition. “NetManage’s specialized solutions for integrating, Web enabling, and accessing enterprise information systems will strengthen and advance Micro Focus’s set of offerings.”

NetManage was getting its financial house in order as 2007 progressed, and grew sales in the fourth quarter by 27 percent to $10.9 million and even brought $1.7 million to the bottom line; for the whole 2007 year, sales only rose by 1.4 percent to $36.1 million and it had a loss of $1.3 million–about half of the loss it had for the 2006 year. Clearly, NetManage has been on the mend in recent quarters, and given that the company has 10,000 customers and ended 2007 with $25.4 million in cash, it was an obviously attractive takeover target. In fact, despite the fact that over the past five years NetManage’s sales have dropped and it lost money in three of those years, sales have stabilized and it is on its way to profits again. And that makes NetManage an acquisition target for any company that wants to get into legacy shops to do application modernization. All that cash is still there, and that means Micro Focus is really getting its hands on NetManage for about $48 million.

When you consider that NetManage brings in about $22 million a year in maintenance fees, Micro Focus will be able to recoup its investment in two years. Any incremental product sales that can be made with the NetManage OnWeb, Rumba, ViewNow, Librados, and SOA Planner products is gravy. And given that Micro Focus is focused on COBOL, which mostly runs on mainframes, thanks to its own tools as well as those it got through its $40.7 million acquisition of COBOL rehosting rival Acucorp last May, the NetManage buy gives it entrée into OS/400 and i5/OS shops that tend to prefer RPG (although there is some COBOL in the banking, insurance, and believe it or not the telecommunications industries among the AS/400 faithful). In short, the Acucorp deal was about Micro Focus solidifying its position in COBOL and preventing another player from coming into its space, while the NetManage deal is about Micro Focus moving into new–and specifically, OS/400 and i5/OS–spaces as well as solidifying its position with adjunct mainframe and midrange system tools.

“The recommended offer for NetManage is consistent with Micro Focus’s strategy of acquiring companies complementary to our core areas of expertise, where significant synergies and benefits can be derived,” explained Stephen Kelly, chief executive officer at Micro Focus, which is a publicly traded company that is on the London Stock Exchange. “The combination of Micro Focus and NetManage will enhance Micro Focus’s position as a leading player in the application modernization market and provide the enlarged Group with further opportunities for growth through a more comprehensive and broader product offering. Due to the complementary nature of the two businesses from a market, product, and financial perspective, we are well placed to deliver value from this acquisition.”

Micro Focus is located outside of London, England, in a town called Newbury and has a second headquarters office in the Rockville, Maryland, one of the big suburbs of Washington, D.C. (Can you tell that Uncle Sam still uses a lot of COBOL?) NetManage moved its headquarters to Cupertino, California, many years ago, but still maintains its development labs in Haifa, Israel. Kelly said that Micro Focus intends to fully merge NetManage into the Micro Focus group pending the completion of the deal, which is contingent on NetManage keeping its cash and equivalents balance at or above $25 million. The companies have to get the deal approved by NetManage shareholders and various government regulatory bodies, and Micro Focus says this should be accomplished by June. The boards of director of both companies have unanimously approved the deal.

Micro Focus said that the NetManage deal should bring money to its bottom line in the fiscal 2009 year ended in April 2009, not including amortization of intangible assets and whatever restructuring costs the deal has; Micro Focus estimates that it will book a $10 million restructuring charge at this time. The company did not outline how it might cut costs and merge product lines, but we will be chasing this down for you.

In a separate announcement, Micro Focus said that organic growth and favorable currency exchange rates had driven sales for the year higher than expected, and added that it would report annual sales in the range of $226 million to $228 million when it releases its numbers on June 27 for the fiscal 2008 year ended on April 30. Micro Focus had been targeting $225 million in sales for the year, up 31 percent from the $171.6 million in sales the company had in fiscal 2007. Micro Focus expects to end fiscal 2008 with $92 million in cash, about half of which will be burned to buy NetManage.

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